Fishburn Hedges

15.09.2011

On 12^th September, the most significant changes to British financial services since the deregulation of the late 1980s were proposed in a report by the Independent Commission on Banking. The following day, we hosted a distinguished panel of speakers who discussed the likely impact for British business and the wider economy. 

On the panel:

• Michael Fallon MP, Deputy Chairman of the Conservative Party and member of the Treasury Select Committee since 1999.
• Andrew Gray, Head of UK banking for PricewaterhouseCoopers (PwC)
• Iain Dey, Deputy business editor of the Sunday Times

Chair: Jason Nisse, Director of media strategy at Fishburn Hedges

The headline points were:

• There is cross-party support for the Vickers report, but the Chancellor has a degree of flexibility in implementing the changes by 2019. 
• The banks won’t be able to absorb all of the additional £4-7bn annual costs – some of those funding costs will be passed on to consumers

• Additional capital requirements may make British banks less internationally competitive.

• There is no consensus that the Vickers report will result in more competition in the banking sector.   

Below we explore these issues in more detail.

Is the timetable workable?

Michael Fallon assured the audience that the Vickers report was welcomed by all parties and supported in principle by the Chancellor. No-one in Government wanted to threaten the supply of credit, or damage UK competitiveness.

Tellingly, by welcoming the report in principle, the Chancellor had carved out for himself a great deal of flexibility between now and 2019. He can now decide the pace of change. The Chancellor is set to decide which parts of the reforms can be included in the Draft Financial Services Bill, and which aspects require separate and later legislation. George Osborne did not “sound like a Chancellor who was in a rush” and will need to consult with the EU and G20 before implementing any reforms.

The panellists argued that 2015 was a sensible date for the review of competition, given that account switching needs time to bed in. Ring-fencing by 2019 was a “long-stop” deadline – whether it was achieved by 2019, or slightly sooner, was not that important. In reality, argued both Dey and Fallon, the ratings agencies will soon start to do some of the regulatory work for us, by scoring retail and investment activity differently.  

On the politics, Fallon claimed that there was no difference within the Coalition – and that Vince Cable in particular was “perfectly content” with the recommendations and timetable.

Key criticisms of Vickers

Capital costs

Gray and Dey both agreed that the Vickers report may have some failings. Dey questioned whether banks needed to hold more than 10% of risk-weighted assets. He suggested that major UK banks may not have required a bailout, if they held their current capital levels, at the time of the crisis.

Social costs

Dey also queried whether the reforms were entirely beneficial for the consumer and thought that the report took a narrow view of social cost. Gray and Dey both agreed that some of the £4-7bn in additional banking costs will be passed on to consumers, with the price of borrowing set to rise and a clear sign that mortgages would be more expensive and harder to obtain. Dey said that job losses were an inevitable consequence of additional costs. “Is the juice worth the squeeze?” he asked.

International competitiveness

The new requirement that banks hold loss-absorbing capital of 17-20% was a particular concern. Dey felt that British banks would suffer vis-à-vis their international competitors. He questioned whether the reforms were justified when other countries have not implemented similar reforms.

Which banks will be happiest with Vickers?

Dey pointed out that Standard Chartered’s share price increased after Vickers reported. Lloyds will be pleased at not having to sell further branches. Dey suggested that the biggest winners are set to be international competitors like Goldman Sachs and JP Morgan.

More competition

Gray was sceptical about the report’s impact in promoting competition. He pointed to historical evidence which shows that people rarely change their current account, regardless of whether it is easy to do so. Dey said that there are not large queues of firms aiming to set up new banks. He also mentioned the huge start-up costs and the prohibiting requirement that new entrants have some existing infrastructure in place.